Wall Street Shake-Up Sets Off Steep Drop in Global Stocks

By Blaine Harden and Mary Jordan
Washington Post Foreign Service
Tuesday, September 16, 2008

TOKYO, Sept. 16 -- Japanese stocks plunged as much as 5.4 percent in early trading Tuesday, driven by gloom about Wall Street and spooked by the debts of Lehman Brothers to several Japanese banks.

Elsewhere in Asia, stocks in South Korea were down 6.3 percent while Hong Kong's Hang Seng index was off by as much as 6.9 percent, following Lehman's bankruptcy filing Monday.

The investment firm's Japanese unit sought bankruptcy protection in a Tokyo court Tuesday, according to Kyodo news agency. The Japanese government ordered Lehman Brothers Japan to halt all operations, excluding the return of assets to customers. Meanwhile, the Bank of Japan injected $24 billion into the financial system Tuesday, and South Korea's finance ministry said it was prepared to take similar steps.

In Japan and across most of Asia, markets were closed Monday, a day when nearly all other world markets fell sharply in reaction to financial turmoil in the United States.

Japanese banks declined sharply across the board Tuesday morning. Aozora Bank plummeted 19 percent, Mizuho Financial Group was down 10 percent, and Mitsubishi UFJ Financial Group, Japan's biggest bank, fell 8 percent.

Several Japanese banks are owed $1.62 billion by Lehman, according to the firm's bankruptcy filing in New York. Documents said Lehman's largest creditors were Aozora, owed $463 million, and Mizuho Corporate Bank, part of Japan's third-largest banking group, owed $289 million.

But Aozora said Tuesday that its exposure to Lehman had been vastly overstated. In a statement on its Web site, the mid-size Tokyo bank said its exposure "could be reduced to less than $25 million," less than 1 percent of its capital.

Mizuho Bank, an institution with lots of cash, also said in a statement that its exposure to Lehman was "significantly less" than reported.

Lehman has had a strong presence in the Japanese bond market for several years and enjoyed a good reputation among major banks here, according to Hiromichi Shirakawa, chief economist in Tokyo for Credit Suisse.

"The size of these reported debts is not that big, but compared to the annual profit of some of these banks, it is not a small number," he said.

Banking stocks were pounded in many European capitals Monday, even as state and private banks in the region injected tens of billions of dollars in liquidity into markets to mitigate the impact of Lehman's collapse.

Britain's benchmark FTSE 100 index dropped 3.9 percent, and stocks fell 3.78 percent in Paris. The steepest drop was on Russia's MICEX index, which plunged 6.18 percent.

Russian President Dmitry Medvedev told the country's largest business association, the Russian Union of Industrialists and Entrepreneurs, that "the situation in our economy is on the whole completely stable."

But Alexander Shokhin, the business group's president, warned in televised comments that Russia faced a growing list of woes: "The stock market is plunging, capital is fleeing, there is a severe shortage of liquidity in the banking system, prices for many core exports are falling, and inflationary pressures are strengthening."

A chief concern in Russia, as elsewhere, is the tightening access to international credit and the higher prices companies may have to pay to borrow money from abroad.

In Britain, the economy has been reeling from the U.S. credit crunch. Housing sales are at a standstill, home prices have fallen dramatically, and sales of items from cars to retail goods are down.

Henk Potts at Barclays Wealth said there have been so many difficult days on the London stock exchange this year that steep plunges have become almost common.

"In the old days, a 200-point drop would be huge movement. Now it's disappointing but not disastrous," Potts said. He joked that "a triple-digit drop is just another day in London."

HBOS, Britain's huge mortgage lender, closed 17.6 percent lower Monday. Barclays dropped 9.8 percent, and the Royal Bank of Scotland fell 12.2 percent.

Workers in London's financial district were fixed on Lehman's 33-story glass building, one of the city's tallest, in Canary Wharf. There, many of the firm's 4,500 employees were packing up their belongings.

With security guards at the revolving doors and a line of black taxis waiting to whisk them away, the employees left in waves -- nearly all weighed down with boxes.

"I have lost everything. My wife called me crying," said one Lehman employee who did not want to give his name. As he left the office, he said he had no idea what he would do next: "We don't even know if we get paid this month."

Jordan reported from London. Correspondents Philip P. Pan in Moscow, Ariana Eunjung Cha in Shanghai and special correspondents Karla Adam in London and Akiko Yamamoto in Tokyo contributed to this report.

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